Tax department needs big overhaul PDF Print E-mail
Saturday, 03 August 2019 00:00
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From ongoing GST-mess to raising direct tax demands that can't be collected, various CAG reports paint worrying picture

Even as the controversy over whether the taxman hounded Café Coffee Day founder VG Siddhartha to death—his suicide note spoke of the taxman’s pressure—continues to simmer, a series of reports from the CAG point to the need for a big overhaul of the tax department; and though the CAG doesn’t use the term tax-terror, there is enough in its report to suggest this remains an issue. First, since prime minister Narendra Modi came to power, there has been a 50% rise in disputed taxes, mostly due to high-pitched assessments by the taxman. Tax disputes, for direct taxes, rose from Rs 410,523 crore in FY14 to Rs 623,539 crore in FY18; and this is after the government is supposed to have come up with a series of measures to reduce such litigation.

According to the CAG, while there were 3 lakh pending cases at the CIT (Appeals) in FY18, Rs 5.2 lakh crore was locked up in them; it was Rs 4.4 lakh crore in 0.8 lakh cases at higher levels. While the CAG’s data on arrears is quite different from those in the budget, what is important is that the taxman has told the CAG that 98.2% of these are “difficult to recover”, making you wonder why the disputes are being raised then. While the budget says the amounts under dispute were Rs 7.8 lakh crore in FY18, the CAG report cites a somewhat similar number—Rs 7.4 lakh crore—as “arrears of earlier year’s demand” and then adds another Rs 3.8 lakh crore as “arrears of current year’s demand”, taking the total arrears to Rs 11.1 lakh crore in FY18 and, of this, Rs 10.9 lakh crore is said to be “difficult to recover”.

While the latest CAG report on direct taxes doesn’t have data on how many cases the taxman loses after making large tax demands, an earlier indirect-tax report said the success ratio of the tax department’s appeal against adjudication orders fell from 33% in FY14 to 27% in FY16; it fell from 34% to 18% in the high courts and from 19% to 11% in the Supreme Court.

The CAG details where the taxman got it wrong in several cases; in agricultural income exemptions, for instance, the CAG found that in 22.5% of the cases, exemptions were allowed without adequate documentation and verification of supporting documents. But more than this, the report shows just how badly the system is broke. The fact that direct tax refunds equaled to around 15% of total collections in FY18 suggests the taxman is forcing corporates to pay higher taxes to meet targets, and refunding it later. A earlier CAG report had documented an ‘illusory demand’ of Rs 10,109 crore on SBI on March 30; this was duly paid and then refunded on April 2. Similar demands were made even the year before this, on SBI as well as other banks; such tricks, the CAG recorded, resulted in “inflated collection of revenue of Rs 14,185.74 crore” in FY16 or around 10% of the Mumbai region’s corporate tax collections for the year.

And while the taxman does several search and seizures, it detected just Rs 25,547 crore from 13,487 such operations in FY18; considering Rs 10 lakh crore of direct taxes were collected that year, banning such seizures/searches should be considered. It would vastly improve the taxman’s image while not affecting collections as much. And while it is a good thing that 83% of direct taxes collected in FY18 were based on TDS and self-declarations by assessees—another 9% was collected by way of surcharges and cesses—the fact that assessment of returns added just 8% to collections also suggests the taxman’s ability to catch tax theft is poor.

The picture gets worse in GST where, in FY19, the centre’s share of collections fell short of the target by a whopping 22%; Rs 5.8 lakh crore were collected vs the Rs 7.4 lakh crore target. And, in FY18, total indirect tax collections grew just 5.8% vs 21% in FY17 or the pre-GST year. Given very little of the original GST plan has been implemented so far, the CAG says GST “has remained a system still in the making even after nearly two years of roll out with the entire return mechanism undergoing major changes”. Apart from huge problems in implementation from the vendor’s side, the CAG points out that while the GST Council was told the tax could be rolled out from July 1, 2017, the final rules and forms were notified on 19 June, leaving little time for software development and testing of the system.

In July 2018, the CAG points out, or one year after the introduction of GSTR-3B—GSTRs 2 and 3 were put on hold—the GST Council announced that a new simplified return mechanism would be implemented from 1 January, 2019. “The new return mechanism is yet to be finally rolled out (June 2019), which is two years after introduction of GSTR-3B as a temporary measure.” As a result of various ad hoc changes, like delinking of the filing of GSTR-1—detailed invoices of items sold by firms—and the payment of GST dues, just 65% of the required returns were filed in December 18. Apart from this being a poor record, given that GSTR-1 data is used to auto-populate GSTR-3B, this means taxes paid based on this will also be incorrect; and input tax credits will be delayed since a third of GSTR-1s have not been filed. In other words, major defects in GST still need to be ironed out, apart from the problems arising from there being too many rates. All told, the CAG reports on both direct and indirect taxes point to the need for a major overhaul of how the tax department functions


Last Updated ( Monday, 05 August 2019 04:42 )

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